Approving a Partnership Agreement—Board Paralysis at the State Association - Case Study

Steve Miller, Executive Director of the State Association of County and Municipal Officials (SACMO), was so frustrated by his board’s inability to make a final decision, he would have pulled his hair out. Not that doing so would have been literally possible, as his head was as smooth and hairless as a baby’s bottom. He was often called “Mr. Clean” around the office, and it wasn’t because of his ethical perspective, which was otherwise exemplary, but rather because of his resemblance to the cartoon character that was used for decades to sell the famous household cleaning product.

Each time SACMO’s full board met and considered the revised version of the partnering agreement with an online job board vendor, Miller had to re-explain, almost from the beginning, what the proposal involved, why it was taking so long, what the objections were to the previous version, what the response was from the vendor to the suggested changes to the contract, and what input SACMO’s pro bono attorney provided on the issue. This then opened up the full range of issues in the agreement for debate one more time.

He knew that some of the concerns raised by his board were valid. But he also felt that many of these problems could be worked out easily on the fly outside of the contractual process. It would be impossible to anticipate every imaginable hypothetical situation that might actually come up once the job board became operational. Miller did not feel that his board appreciated the fact that there had to be at least some measure of trust between parties to a partnering agreement, or there would never be an end to the process of creating the language that would cover all conceivable contingencies.

The vendor, Harbaugh JobBoard Services, was established and reputable; there were almost 400 other state and national associations that were currently in a contractual partnership with Harbaugh. There was no evidence that Harbaugh had ever violated any of the existing partnering agreements, and Miller had verified that there was general satisfaction with the services the firm provided.

Miller had already been informed by Jeff White, Harbaugh’s marketing staff associate, that the company’s patience had a limit, and that perhaps another association with related interests, such as the League of State Municipal Workers, would be more responsive to Harbaugh’s time constraints. Although the vendor understood the restrictions on what Miller could do unilaterally, there had to be some deadline placed on the process if SACMO was to continue to be a viable partner with them on the project, or they would be forced to withdraw. Each unnecessary cycle of board meeting, re-referral to a committee, and renegotiation with Harbaugh meant the loss of revenue that was expected from the new Web site. With the clock ticking, it also became more likely that competitive job board sites, spearheaded by Harbaugh’s competitor, would capture whatever market SACMO would be seeking beyond that of its own membership. If that had been permitted to occur, both SACMO and Harbaugh would suffer the consequences.

Miller had been quite excited when he had received an unsolicited e-mail more than two years earlier from Harley Harbaugh, founder and president of Harbaugh JobBoard Services, proposing a potential partnership. Harbaugh was the second largest vendor of online job boards in the country and was in a struggle with one other for-profit company for expanding its reach in niché markets. Harbaugh and its fierce rival were engaging in cut-throat competition, with both companies aggressively seeking to partner with large state associations in all 50 states, seeking to maximize market share.

At the moment, each vendor sought to recruit as many associations as possible to its client list, offering very favorable terms to them, even if there might be a short-term net loss of revenue to the vendors by doing so. Both firms recognized a benefit in signing up as many associations as they could, if only to keep them out of the clutches of their rival.

In the long run, each expected that only one would survive. Both vendors assumed they had to take reckless chances, knowing that failure would result in the demise of one or the other company and losses for the banks and venture capitalists that had taken a chance on their competing business models.

The associations that they were enticing to be their customers, in contrast, operated in a completely different environment. Few had any fear that a rival would spring up out of nowhere and take away their members. Most had existed for decades and operated with a mix of income from membership dues; fees for services; the sale of publications, Web site advertising, and mailing lists; partnerships with vendors who sold discounted insurance, affinity credit cards, and publications; and grants. Major decisions involving commercial partnerships were made by the full board at quarterly board meetings. These might occur as long as four months apart, depending on the season of the year.

For some vendors, three months to make a decision was incomprehensible, and some explicitly avoided partnering agreements with the nonprofit sector because of this difference in culture. Others found these association-based markets to be so lucrative that they suffered through the inevitable delays and the potential for stillborn agreements after hundreds of hours of fruitless wooing of potential partners and negotiating contracts that were never signed.

Miller had spent considerable time researching Harbaugh and its major competition, consulting his colleagues who were executive directors at other state associations that had job boards. He found that what Harbaugh was proposing made perfect sense, and that the initial terms of the offer were much better than what Harbaugh’s competition was currently offering. After his initial positive response to Harbaugh’s e-mail invitation, Miller had been assigned to work with Jeff White, a Harbaugh marketing associate, for further details.

Within a few weeks, he got back to White and let him know that SACMO was interested, and that they should meet. White proposed meeting the next day, but Miller was quite busy dealing with an upcoming board meeting and a statewide conference. So, they had scheduled a lunch meeting for three weeks later to discuss how the proposal would work.

Miller was excited about the proposal, as setting up a job board on the SACMO Web site was one of the tasks that was on his list of things to do when operations got a bit less hectic. But knowing that there was limited time to pursue every good idea, Miller had put this on the back burner so as to carve out more time to resolve other, more pressing, problems that were required to be addressed.

To have a reputable company with a stellar track record approach him and have the capacity and expertise to remove all of the barriers was a major coup for his association. And one of the most attractive features of the offer was that Harbaugh had a template that would work quite well with the Web design SACMO already had in place.

White estimated that his technical staff could begin work right away once the contract was signed, and it might only take 15-30 days before the job board would be up and running, customized to look exactly like other Web pages on the SACMO site and with all of the features customized in accordance with their agreement.

Harbaugh was making an offer to Miller for a collaboration that would be on terms that would be quite beneficial to SACMO, provide it with guaranteed revenue, and provide a new, attractive member benefit. Harbaugh proposed to integrate a state-of-the-art job board within SACMO’s Web site, handle all back-office operations such as technical support (using an 800 number), billing, collections (always a difficult aspect of any entrepreneurial endeavor), and Web design, and provide a substantial percentage of the revenue the job board generated to SACMO.

Adding a state-of-the-art job board, such as the platform designed by Harbaugh, had been a goal of Miller for several years. As envisioned by Miller, there would be a Web page on the SACMO site for members to post job opportunities. He had considered the costs to the organization of managing the software; posting the jobs; and handling the billing, customer service, technical service, and collections. It seemed overwhelming to do all of this in-house. He had given little thought to the possibility that such a site might have the potential to generate net revenue, considering the staff time that would be needed to provide for its care and feeding.

But even he had to admit that the comprehensive job board and career services offered by Harbaugh came with nifty standard bells and whistles that were well beyond his imagination. Of course, there would be job postings, easily posted by organizations seeking job candidates without the need for anyone from SACMO to be involved, with payments made by credit card or PayPal processed online. SACMO, if it so desired, could delete any postings that it deemed were inappropriate, or that were not for jobs with local governments in the state. The entire process, from posting to billing, would be completely automated.

In addition, the site would have links to hundreds of articles, in a searchable format, providing career advice, résumé preparation services commissionable to SACMO, courses that would be certified for continuing education and commissionable to SACMO if the purchase was generated by clicks on SACMO’s job board pages, and career-related blogs moderated by experts. Job seekers could sign up for e-mail job alerts, letting them know when a new job was posted that fit their profile.

Job seekers could post their résumés with privacy, and prospective employers would be able to view these résumés without contact information, requiring the permission of the job seeker to view the contact details. And when the employer received that permission and paid a reasonable fee, a modest payment would be deposited directly into SACMO’s account.

All services would be free to job seekers, and job posters would pay a posting charge with more than half the revenue going to SACMO for jobs posted by SACMO members. The site would also include jobs posted by non-members who paid to have their job listings posted on the SACMO site, commissionable to SACMO.

A marketing and sales team at Harbaugh was working full-time to convince job posters from all over the country to post on the network. When job posters chose to include their job postings on the SACMO job board, which they could do by a simple check box from a list of job boards on the Harbaugh network, a portion of their fees would be provided to SACMO. And when a SACMO member organization included its posting on boards on that network other than the SACMO job board site, SACMO would receive a share of the fee above what the organization would receive if the job had appeared only on the SACMO online job board.

Harbaugh proposed to customize the job board Web pages to look exactly like other pages of the SACMO site, at no cost. Most importantly, Harbaugh would handle all of the work involved, including customer service, billing, collections, and technical assistance. SACMO would maintain complete control over many of the site’s features, such as the ability to set prices and provide discounts to members.

The attractive content included on the career site pages would generate traffic from a wide range of individuals. Site visitors would be able to view banner and button ads at the option of the association. If it chose that option, the revenue from these ads would be shared, based on which party generated the ad sale. A year earlier, SACMO had insisted that it be able to screen ads for appropriateness, and within two hours of being informed about that request, White had e-mailed back a modification of the agreement language to permit that right.

Although Harbaugh had initially asked for a five-year contract, the firm had agreed to a two-year deal at the insistence of the SACMO board.

The only fly in the ointment was the inability of Miller to shepherd the final approval through his board process. It was not for lack of motivation; Miller felt completely hamstrung by all of the hoops that had to be navigated. As soon as he thought he had finally brought the process to a conclusion, another objection was raised by one board member or another that stymied his effort to get the authorization he needed to get the contract signed and the partnership finally operational.

Unfortunately, neither Miller nor White and his organization could have anticipated the problems of getting the contract formally approved by the association. It was a nightmare. Had the decision-making rested entirely with the executive director, the entire process might have taken only a few months.

Even this amount of time was far longer than what one would expect had the organization been a for-profit, with executive decision-making centralized entirely in the hands of the CEO. But as an executive director of a federally tax-exempt 501(c)(6) nonprofit association, and a board of directors whose members were not always on the same page with respect to primary mission and goals, it was not unusual for decisions to take much longer than their for-profit counterparts. In this case, with a board of directors consisting primarily of elected officials who reveled in exercising their power to micro-managing many aspects of the organization, Miller was unable to consummate the deal internally, despite the enthusiasm within his organization for doing so quickly with the vendor.

At each meeting, the Harbaugh collaboration would be first on the agenda under “Old Business.” And at each meeting, there was some small detail about the partnering agreement that sabotaged final ratification of the agreement, requiring Miller to go back to Harbaugh to seek one minor change or another, and then report back at the next quarterly board meeting. Or, at times, the board deputized its Planning Committee to agree that whatever concern raised at the board meeting, legitimate or otherwise, was sufficiently addressed to recommend signing the agreement.

Complicating the approval was the fact that the Planning Committee had serious problems of its own. Two staff members, each with responsibilities for staffing the committee, had resigned successively within six months of joining the staff, taking with them much of the institutional memory for this particular partnership. Miller had been forced to take over the Harbaugh contract negotiations while he was engaged in finding replacements for those staff members, and this further delayed consideration by the Planning Committee of the changes the board had asked to be made to the agreement. During the time period when there had been no Planning Committee staff member, no staff from SACMO was communicating with Harbaugh, and the Planning Committee had decided not to meet, further delaying the process.

After two years of this on again, off again process, Harbaugh was quite resigned to recognizing that SACMO was unwilling or unable to reach an agreement. White was quite patient, but two years of accommodating SACMO’s needs about agreement provisions that were quite unlikely to ever need to be enforced was wearing him down. Other associations he had worked with during the past five years had also had this irritating aspect of their governance, but only SACMO’s lack of ability to “get to yes” appeared to him to be pathological and needing the equivalent of organization therapy.

For his part, Miller could only apologize profusely for each delay and explain that his board consisted of individual personalities who were oblivious to the irrational requirements they placed on partnering agreements with third parties. He continually explained that his board’s disability was not directed against Harbaugh itself, but rather was symptomatic of its dysfunctional approach to decision-making. He considered guaranteeing that the board would complete action on the contract at the next meeting, but he knew in his heart that doing so would be making a promise he likely would be unable to honor.

At one point in this process, Miller had joked with his wife that he was hopeful that the job board would become available soon with or without the participation of SACMO, as he would be one of the first to utilize its services to find a new professional opportunity in his field. As he sat in his board meeting today, enduring yet another likely postponement of the decision, that flight of whimsy almost a year earlier seemed less capricious and more like a plan.

At this moment, as Miller was reflecting on the storied history of this agreement, the board was ponderously moving closer to delaying approval once again. The motion on the floor was to refer the contract back to the Planning Committee to come up with revisions to the contract on a provision that had twice before been revised by that committee, and had already been approved by the board almost four board meetings ago—before a nascent issue had derailed the process. At the request of a single board member who had been newly elected to the board in the interim, the full board had agreed that there might be some situation, however remote, in which Harbaugh JobBoard might gain a small windfall if a peculiar set of circumstances occurred. In any case, the board member had insisted that the provision be clarified and the board was poised to give its assent to that demand, referring the contract back to the Planning Committee.

The chair of the board, a small-town mayor from the rural, western part of the state, was not particularly interested in having an association online job board. He recruited his small staff from his large campaign contributors and their relatives, his own relatives, and his personal friends. However, he recognized that there was some enthusiasm from the association’s staff and from other members of the board to pursue this opportunity. But as for devoting any political capital in moving the process to a conclusion, he didn’t feel that this was particularly a good investment. The chair also was an opponent of an effort by the board to hire an attorney on staff to deal with the myriad legal problems that came before the association, including partnering agreements, contracts, leases, and liability issues. Instead, he had offered the services of an attorney who was one of his campaign contributors who, for a reduced fee, would review these matters.

This saved the association legal expenses. But it also delayed most legal matters involving the association, because this particular attorney did not make the association business a priority as she would have done had the association been a full-paying client.

This was not the first time that the board had thrown a monkey-wrench into Miller’s plans to partner with an online vendor. Several years earlier, he had been approached by a firm that designed online shopping malls. The partnership had never been approved by the board. By the time the Planning Committee and the board had felt satisfied that there was an air-tight agreement between the two parties, the vendor had gone belly-up. In retrospect, the fact that this deal never was executed was unimportant, but Miller began to understand why those in the for-profit sector often demur when trying to work with their counterparts in the nonprofit sector. He came to realize that one of the great advantages of being an entrepreneur was the ability to make decisions quickly without much second-guessing. Power within a nonprofit organization, by comparison, was much more diffuse.

Meanwhile, Miller sat at the board meeting silently. He debated whether to explain to the board that he needed to find some way to maintain Harbaugh’s interest in working with SACMO. Otherwise, Harbaugh would likely pull out.

Miller recognized that his evaluation and annual contract was on the board agenda for the following meeting, and he hesitated to vocalize another protest of what he judged to be another unnecessary delay in approving the Harbaugh partnering agreement. Once his new contract was signed, he perhaps could be a bit more aggressive in serving as an advocate for approval of the final version, he rationalized—that is, if Harbaugh was willing to accept yet another delay.

Discussion Questions:

1. How much power should nonprofit organization executive directors have to commit their organizations to partnership agreements without involvement of their boards of directors?

2. What changes might SACMO make in its governance structure to avoid situations that would make it hamstrung to enter into partnerships and collaborations in the future?

3. What are some of the reasons why it may be appropriate for a nonprofit corporation and a for-profit corporation to have a different standard entering into a partnership agreement with respect to timelines and the extent to which decision-making is decentralized among various stakeholders within the organization?

4. What are some of the procedures and policies a nonprofit organization might follow if approached by a for-profit company with a proposal to enter into a partnership with respect to determining whether the for-profit is legitimate, stable, and able to deliver on its promises?

5. Is there anything inappropriate about the association retaining the services of an attorney who has a less than arms-length relationship with the chair of the board of directors?